Temasek and Kookmin choose their timing well

Citic Securities is among a glut of financial issuers lined up for the second half (AFP)

The sell-off in Asian markets yesterday following Friday’s disappointing employment data in the US and signs of slowing domestic demand in China made the timing of last week’s sell-downs in the financial sector seem even more prescient. However, it is likely that the sellers were much more concerned about getting ahead of a large pipeline of deals in the sector than the effect that a deteriorating economy might have on the region’s banks.

With the possibility of billions of dollars worth of financial sector shares hitting the market in the second half of the year, the slight rebound in share prices and the return of risk appetite among investors during the past couple of weeks helped create an obvious window for those that were ready to go last week. Share prices in the sector are down from their highs, but there is no guarantee that they will be any better a few months down the road — especially with so much paper lining up.

It was no surprise that Kookmin Bank hit the market, since everybody knew that Korean regulations required it to sell its shares in KB Financial by September at the latest. After unsuccessfully trying to offload the shares earlier this year, the bank’s pricing power was only going to weaken as it got closer to the deadline — especially if it had to compete with a bunch of other transactions — and, to get the deal done, it sensibly chose to accept a larger discount than it pushed for three months earlier.

Investors liked the discount and were likely also pleased that the overhang of the sell-down was being removed, which allowed the price to be fixed at W51,800 — the mid-point of the W51,600 to W52,000 range. This resulted in a 3.2% discount and a deal size of W1.81 trillion ($1.71 billion) — the largest Korean equity deal year-to-date.

According to sources, the deal attracted more than $4 billion of demand and more than 140 investors. The buyers included good quality long-only investors, existing shareholders and hedge funds. The majority of the demand came from Asia with domestic Korean funds said to have contributed about 25%. The share price also responded well to the sale, gaining 0.9% on Friday and another 0.9% yesterday.

The large size meant a lot of banks were keen to be part of the transaction and while Kookmin was less pushy on the discount than in April, it was still trying to get the best deal, which meant it took full advantage of this competition between the banks. And while the bidding and negotiation between Kookmin and its potential underwriters was continuing, Temasek squeezed ahead with its $3.6 billion sale of shares in Bank of China (BOC) and China Construction Bank (CCB) on Tuesday. The BOC block raised $2.4 billion, while the CCB transaction raised $1.2 billion. Both deals were handled by Morgan Stanley on a sole basis — a nice win for the US investment bank, especially since it was never bid out to a wider group of banks.

This deal was more unexpected, particularly the CCB portion since Temasek had added to its stake in the Chinese lender at a higher price only in November last year. It also seemed a bit odd that Temasek would choose to bring two competing blocks in the same sector to market on the same night. However, the decision to sell shares in both banks might have been driven by a desire to avoid speculation that a monetisation of its investments in one bank may be followed by sell-downs in other banks before long.

When Temasek raised $570 million from the sale of shares in Bank of China in November 2007, it returned to the market just two days later with a $255 million sell-down in CCB. And the day after that it trimmed its stake in Chinese shipping company China Cosco Holdings through another block, which raised $275 million.

The day after last week’s sale, Agricultural Bank of China’s (ABC) share price dropped 4.8% amid concerns that it may be next. Temasek invested $200 million in ABC’s IPO last year.

Observers also noted that Temasek had likely sought an informal approval from Beijing to sell shares in both companies and when a stockmarket window opened up, it chose to take advantage of the opportunity.

CCB’s shares have been heavily shorted since mid-June when media reported that Bank of America Merrill Lynch might sell as much as half of its holdings in the bank — currently valued at about $20 billion — to reduce its risk levels ahead of the adoption of Basel III when its lock-up expires on August 29. This meant there was a lot of natural demand for Temasek’s $1.2 billion placement. Interestingly, however, analysts say that Temasek might well buy a portion of BoA Merrill’s sell-down, which, because of the greater size, is expected to come at a wider discount than its own. And since CCB’s share price can also be expected to remain under pressure until BoA Merrill does sell, Temasek could quite easily be restoring its stake in CCB at a significantly cheaper price — if that is indeed its intention.

At a media briefing to announce its latest annual financial review on Wednesday last week, Temasek’s managing director of investment, Nagi Hamiyeh, stressed that China is the firm’s leading investment destination, accounting for about 20% of its portfolio. “We are still looking at investments in China and we are very comfortable with our position there,” he said, in response to a question of why it trimmed its stakes in BOC and CCB. He referred to the sell-downs as “a periodic rebalancing of the portfolio” and noted that the firm remains heavily invested in both banks.

Following last week’s sales, Temasek holds about 6.3% of BOC’s H-share capital and 6.45% off CCB’s H-shares.

Also taking advantage of the improved market last week was Korea Deposit Insurance Corp, which raised W148.6 billion ($141 million) from the sale of its remaining 0.6% stake in Shinhan Financial. The deal, which was led by J.P. Morgan and Woori Securities, was in the market on the same night as Kookmin. It too priced above the bottom of the W50,960 to 52,000 range, at W51,000, which resulted in a 1.9% discount to the latest close.

Shinhan’s share price hasn’t responded as well as KB Financial’s, however. As of yesterday’s close it had lost 4.1% from the pre-deal level and was 2.2% below the placement price.

Other potential deals this side of September include Carlyle Group’s remaining stake in China Pacific Insurance (CPIC), which is valued at about $2.7 billion, and China Everbright’s pending H-share IPO, which is expected to raise more than $5 billion. Carlyle last sold $1.8 billion worth of shares in CPIC in January this year and its current lock-up expires today. However, the company’s share price is now some 8.1% below the price Carlyle fetched in its previous sale so it is unclear whether it will chose to sell.

China Everbright did two weeks of investor education in June, but never launched the formal roadshow. People close to the deal referred to the difficult market environment at the time, but investors are also said to have thought that the proposed valuation was too rich. The bank, which is the 11th-biggest lender in China, earlier planned to complete its IPO by the end of July. China International Capital Corp, Morgan Stanley, UBS and China Everbright’s own investment banking arm are joint global coordinators for the offering. They are also joint bookrunners together with a whole slew of other banks, namely BNP Paribas, BOC International, HSBC, J.P. Morgan and Shenyin Wanguo Securities.

Meanwhile, the lock-up from ABC’s IPO 12 months ago expires on July 16. For six of the cornerstones, which invested a combined $4.7 billion, this is the first time they will be able to sell any shares. However, their involvement in the deal was seen to be quite poitically motivated and hence bankers don't expect there will be a lot of immediate selling from them. The other five cornerstones, including Temasek, have been able to sell half of their shares in the past six months, and their stakes are also small enough (their initial investment totalled $750 million) that they may choose to trickle the shares out through the market rather than via a visible capital markets transaction.

The financial sector IPO pipeline for this year also includes China Guangfa, which is expected to raise more than $5 billion from a combined A- and H-share listing; New China Life Insurance, which is targeting about $3 billion to $4 billion, also from a dual listing; PICC Group, the parent company of China’s largest non-life insurer, which is expected to seek at least as much as part of its Hong Kong listing; Citic Securities, which is targeting about $3 billion from an H-share listing; and China Haitong Securities, which is expected to raise about $2 billion, also from an H-share IPO. Meanwhile, China Minsheng Bank is planning to issue up to 1.65 billion new H-shares through a follow-on. At the current share price, that stake is valued at about $1.5 billion.

Whether all of these deals will actually hit the market remains to be seen, but the mere potential of this much issuance does suggest that those going early may be able to fetch a better price.